In: Accounting
Wake-Me-Up Company manufactures 800 pounds of regular ground coffee and 1,200 pounds of specialty ground coffee in which $3,000 of joint costs have been incurred at the split-off point. a. If management decides to use the physical units method to allocate joint costs, how much of the cost will be allocated to each of the two final products?
b. Wake-Me-Up can sell each product at the split-off point or process the products further in relatively similar processes, so management has decided that the most appropriate method for allocating joint costs is the market value at split-off point. One pound of regular coffee sells for $7, while one pound of specialty coffee sells for $10. How much of the joint cost is allocated to regular and specialty coffee? Round percentages to the nearest whole percent.
c. Wake-Me-Up decides to incorporate a processing time weight factor of 1 for the regular coffee and 2 for the specialty coffee. How much of the joint cost will be allocated to each product using the weighted average method? Round percentages to the nearest whole percent.
Solution
Wake-Me-Up Company
Allocation Basis |
Physical Units Method |
Market Value at Split-Off Method |
Weighted Average Method |
Regular Ground Coffee |
$1,200 |
$960 |
$750 |
Specialty Ground Coffee |
$1,800 |
$2,040 |
$2,250 |
Computations:
Two products – Regular ground coffee, Specialty ground coffee
Physical units – Regular 800 pounds; Specialty 1,200 pounds
Proportion –
Regular – 800/(800 + 1,200) = 40%
Specialty – 1,200/(800 + 1,200) = 60%
Joint costs = $3,000
Joint cost allocated to Regular Ground Coffee = 3,000 x 40% =
$1,200
Joint cost allocated to Specialty Ground Coffee = 3,000 x 60% = $1,800
Regular ground coffee total market value at split-off = 800 pounds x $7 = $5,600
Specialty ground coffee, total market value at split off = 1,200 x $10 = $12,000
Proportions -
Regular = 5,600/(5,600 + 12,000) = 31.82%, rounded to nearest whole
percent is 32%
Specialty = 12,000/17,600 = 68.18%, rounded to nearest whole percent is 68%
Allocation of joint costs –
Regular = $3,000 x 32% = $960
Specialty = $3,000 x 68% = $2,040
Joint cost per unit = joint cost/total weighted units
Product |
Weights |
Units |
Weighted Units |
Regular Ground Coffee |
1 |
800 pounds |
800 pounds |
Specialty Ground Coffee |
2 |
1,200 pounds |
2,400 pounds |
Total |
3,200 pounds |
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Joint Cost per Pound |
$3,000/3,200 = $0.9375 |
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Joint cost allocated to Regular = $0.9375 x 800 = $750 |
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Joint cost allocated to Specialty = $0.9375 x 2,400 = $2,250 |